Asset allocation is how you divide your money across asset classes — shares, bonds and cash — and it drives most of the ups and downs of your portfolio. Picking the right funds matters far less than getting the split roughly right for your time horizon and tolerance for losses.
The three building blocks
- Shares (equities). Ownership in companies. Highest long-run expected return, largest short-term falls. A broad index fund is the usual vehicle.
- Bonds (fixed income). Loans to governments or companies. Lower expected return, smaller swings, and a different reaction to interest rates.
- Cash. Stable and liquid. Its job is spending, emergencies and short-term goals — not growth.
Real portfolios add property, commodities or alternatives, but most of the behaviour comes from the first three.
Why the split matters more than the picks
If your portfolio falls 30% and you sell, the problem was never which index fund you chose — it was holding more shares than you could tolerate. Allocation sets the size of the ride before any fund selection happens.
It also does the job that no single investment can: it puts together assets whose bad years do not all arrive at once. That is diversification, and it is the closest thing to a free lunch in investing.
A simple starting point
A common rule of thumb is to hold a percentage in shares roughly equal to 110 minus your age, with the rest in bonds and cash. At 35 that is about 75% shares; at 60, about 50%.
Treat that as a starting point, not a prescription. Four questions adjust it:
- When do you need the money? Under three years, shares are a gamble. Over ten, cash is.
- How would you react to a 35% drop? If the honest answer is “sell”, hold fewer shares.
- Is your income stable? A secure salary can support a higher equity weight than commission income.
- How much is already guaranteed? A defined-benefit pension or a large cash buffer changes the rest of the picture.
What the trade-off looks like
| Allocation | Typical role | Behaviour in a bad year |
|---|---|---|
| 90% shares / 10% bonds | Long horizon, strong stomach | Can fall 35–45% |
| 70 / 30 | Growth with a cushion | Can fall 25–35% |
| 50 / 50 | Balanced | Can fall 15–25% |
| 30 / 70 | Capital preservation | Can fall 5–15% |
These are illustrative ranges based on historical equity drawdowns, not forecasts. The point is the shape: more shares means a wider range of outcomes in both directions.
Rebalancing: keeping the plan honest
Markets move, so a 70/30 portfolio becomes 78/22 after a strong year in shares. Rebalancing means selling some shares and buying bonds to return to target.
- Calendar rebalancing: check once a year, adjust if a class drifts more than about five percentage points.
- Threshold rebalancing: act whenever the drift crosses your band.
- Rebalance with new money where possible — direct contributions to the underweight asset and avoid a taxable sale.
Rebalancing is not a profit machine. It is a risk-control rule that prevents a good year from quietly turning you into a more aggressive investor than you intended.
Allocation across accounts, not just inside one
Treat all your invested money as one portfolio. If your workplace plan only offers a good equity fund, hold the bonds in an individual retirement account. The total split is what matters, not each account’s internal balance.
Common mistakes
- Confusing allocation with fund selection. Choosing four overlapping share funds is not diversification.
- Counting the emergency fund as a bond allocation. It is a separate job with a separate purpose; see how much to hold.
- Changing the split after a bad year. That locks in the loss and usually buys back in higher.
- Ignoring costs while optimising the split. A perfect allocation in expensive funds still loses to a rough one in cheap funds — see expense ratios.
- Forgetting inflation. A “safe” 80% cash allocation loses purchasing power every year; see inflation.
Frequently asked questions
Is 100% shares ever reasonable?
For a young investor with a stable income, a long horizon and a high tolerance for losses, it can be. It is not reasonable for money needed within five years.
How often should I rebalance?
Once a year, or when a class drifts five percentage points from target. More frequent rebalancing adds costs without improving outcomes.
Do I need international shares?
Holding only your home market concentrates risk in one economy. A global index fund is a simple way to spread it, though currency movements add their own swings.
Reviewed 22 October 2026. Educational content, not financial advice. See our disclaimer.
